Since 1978, the Chinese economy has seen phenomenal growth. Whether it can be maintained is unclear. The country’s export growth is decelerating quickly, and China already annually invests an amount equivalent to about half its GDP in assets and infrastructure—probably a higher proportion than any other country in peacetime. Now that China has completed its once-in-a-decade leadership transition, its leaders should be preparing to replace the rapid-growth model of the last three decades with one that requires less investment and is less reliant on cheap labor to provide a competitive advantage.

In 1994, China could drive growth by copying technology from other countries. Political features such as the rule of law, intellectual-property rights, labor rights, and democracy were less important, even a hindrance. But as a country gets richer, innovation, productivity, and domestic entrepreneurs become more important. The problem is not that China doesn’t value science and technology. There is no shortage of expertise—many Chinese leaders are trained engineers, and the country invests roughly 2 percent of its huge economy in R&D, a level attained by only a few fairly rich countries. But research shows that these massive investments have had far less impact than one would expect.

One reason has to do with the environment in which Chinese research takes place. Universities in China are tightly controlled by the Ministry of Education. In comparison to their fiercely independent counterparts in the West, Chinese professors are like company employees. Research projects are often directed from the top down rather than being initiated by professors and researchers. The dissemination of research findings often has to take a back seat to the political need to maintain “stability.”

Chinese leaders want economic growth to come from innovations based on technology and science—a laudable goal. But it can’t be achieved by simply adding a massive dose of R&D spending to China’s current growth model. Technology-based growth requires protection for intellectual property, freedom to think and challenge authority, and a government with limited reach and power. In other words, it requires Western institutions.

As the second-largest economy in the world, China needs to prepare for this institutional transition. It will require vision, political courage, and more than a tweaking of the existing system. Does the new leadership have what it takes to move the country in that direction?